Seeing the risk, as well as the bright spot amid the gloom

The peso’s depreciation has not really been causing much alarm on the local financial markets, and that’s the comfort afforded us by a briskly growing economy and confidence in the future fueled by the promise of major infrastructure projects soon to unfold.

Even when the Philippine currency slipped for the first time in 10 years to the P50:$1 level last November and traded near 11-year lows this year, making it the worst performing currency in Asia so far in 2017, we don’t hear Filipinos grumbling.

Fund inflows ebbed as outflows sought the higher yielding dollar as the US Federal Reserve raised its interest rates in December last year, but the local jitters soon eased.

Obviously, the indication is strong that the nation has found new reason to be upbeat about the future with the new administration in place, bringing with it fresh hope for change, for the better.

Was everybody aware the peso registered a 5.35 percent decline against the US dollar in 2016? That was even worse than the 5.2 percent depreciation in 2015. But no one seemed to mind. The exporters welcomed it because that priced their products and services such as in the IT-BPO industry more competitively in markets overseas, resulting in strong growth in exports as shown by trade data in July this year. The overseas Filipino workers, meanwhile, gained more value for the dollars they sent back home to their families here.

Neither do we hear much complaint from the importers’ side. The central bank is quick to point out that the current peso weakness is no cause for concern because the decline will help sustain economic growth through the expected inflow of investment in infrastructure.

Analysts also see nothing so alarming about the slight deterioration in the country’s current account and balance of payments expected this year, viewing that as a result of strong economic growth that has been raising imports, especially of capital goods and materials for infrastructure projects.

Currently trading between P50 and P51 to the dollar, the peso is still close to fair value, according to the generally accepted real effective exchange rate or REER.

However, there is a group that may be shunning investment in the Philippines right now due not only to concerns over a gradual deterioration in the country’s current account, but the insurgency in Mindanao.

Foreign investors have taken notice of the protracted battle for control of Marawi City. Fitch Group unit BMI Research pointed out in a study two weeks ago the peace process between the Philippine government and the Moro Islamic Liberation Front (MILF) may stall further because the government troops were still busy fighting the Islamist militants in Marawi.

In its most recent report, released Wednesday, BMI highlighted the peso’s underperformance relative to emerging markets (EM) since the start of the year could also be an indication of the underlying distortion built up in the economy.

“We believe that any broad-based EM FX [foreign exchange]selloff could hit the PHP [Philippine peso], despite the currency being close to fair value according the REER [real effective exchange rate]” the Fitch Group unit said.

Traders, investors and the general public must balance their views of the Philippine financial market by also looking at the positive factors supporting the economy, as other analysts are pointing out:

Rajiv Biswas, chief economist of IHS Markit, said the extent of the peso’s depreciation over the past 12 months has been moderate and gradual. “The external account position of the Philippines is still sound due to the large annual inflows of worker remittances, as well as increasing export earnings from the IT-BPO industry.”

For Joey Cuyegkeng, senior economist at ING Bank Manila, the outlook for OFW remittances remains resilient, and still high outsourcing revenues are likely to counter the decline in the value of the Philippine peso. He also cited some expected acquisition-related inflows and steady US policy rate decision despite market expectations of another Fed rate hike this December.

Despite the market’s vulnerability, the peso seems to be coasting along well, and that must be the public seeing the reality of the risks faced by the Philippine economy but also acknowledging the positive factors offsetting the gloom.